As the election approaches, tax policy issues are moving to the fore including pass-through entity exemptions used to negate the effects of the cap on state and local tax deductions.
"If the SALT cap expires, then you're going to see some states where they didn't have this legislation, have to figure out what to do, and that's going to go to the policy makers," said Nikki Dobay, a shareholder at Greenberg Traurig.
"State legislators don't always love getting into tax issues, so we'll see how that goes."
The comments came during a webinar on Thursday produced by Tax Analysts, an independent, nonpartisan policy organization.
The cap on state and local taxes was applied as part of the Tax Cuts and Jobs Act in 2017. It limits the deduction to $10,000 and has attracted controversy since it's inception.
The cap is perceived by many as a strong revenue tool for the federal government while bond issuers believe it infringes on their sovereign ability to levy future taxes.
The law heavily affects property owners in high tax states. Within months of the TCJA passing, Connecticut enacted legislation to counter the impact via an accounting workaround that allows the state to issue tax credits to business owners who receive income through their businesses.
New York City and 35 other states have since adopted similar pass-through entity exemptions, that essentially nullifies the SALT cap for business owners.
Tax experts are now wrestling with what happens to the PTEs if the SALT cap is repealed versus leaving it in place.
"We have no uniformity on this topic," said Dobay. "We now have more than 30 states that have adopted these and they all work in different ways. The states have all put their unique twists on them."
All the existing PTEs have been approved by the Treasury Department which caught many tax experts by surprise. Some point to politics to explain how they came to be and why they still exist.
"Small business, which is one of the major beneficiaries of the workarounds, is part of the Republican base," said James Wetzler, an economist specializing in tax policy and administration.
"Once Biden won the election, the Democrats took control of Treasury. They didn't fix it because it would have violated Biden's $400,000 no tax pledge. And secondly why should they anger a major democratic constituency in high tax states to fix a problem the Republicans created?"
Discussions involving the SALT cap deduction stray into policy side issues including how property taxes are assessed, corporate tax rates, standard deduction levels and how much revenue the cap was expected to raise.
"It was a very large number," said Dobay. "I think the SALT cap was the first or second largest revenue raise or pay-for in the TCJA. They needed to make up revenue that was going to be lost in other areas."
Political discussions of the SALT cap reached the presidential level earlier this month when former President
"In light of former President Trump's most recent disclosure, and in light of the fact that Kamala Harris is from San Francisco, my thought is that there's a high probability that the SALT cap would not be extended, that 2025 would be the end of it," said Kathleen Wright, director of the State and Local Tax Program at Golden Gate University School of Taxation.
Given the current state of congressional paralysis there is another possibility. "If you have a divided government, then my best guess as to what will happen is they won't be able to reach any kind of agreement," said Wetzler. "December 31 will arrive, and they'll just extend the existing law for a year or two."
